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Q&A: Navigating Vodafone's Verizon disposal

Later this month, shareholders will be asked to vote on Vodafone's planned disposal of its US arm, so we've set out a basic guide to help you decide how to receive the windfall
January 21, 2014

Dear Investors Chronicle,

Many thousands of shareholders in Vodafone have received papers in connection with the payments due to them as a result of the sale of Verizon shares. These papers are very complex and require Vodafone shareholders to make choices. There is also an American Revenue paper to be completed, but some of the questions are not clear. No mention is made anywhere on the position of those holding Vodafone in an individual savings account (Isa). Could the Investors Chronicle perhaps provide some explanation?

Dr James Farquhar (via email)

Later this month, Vodafone (VOD) will ask shareholders to vote on the proposed disposal of its 45 per cent stake in US group Verizon Wireless to Verizon Communications (US: VZ), for around $130bn (£79bn). The process isn't without complications, however, so we've set out below a guide for shareholders.

Vodafone plans to return $23.9bn in cash to shareholders along with $59.3bn in Verizon shares, although the precise terms won't be clear until the deal completes, probably on 21 February. But, based on Verizon's share price on 6 December, shareholders will receive $1.22 in Verizon shares and $0.49 in cash for each Vodafone share held. Shareholders will be asked to vote for or against the deal at two meetings - a court meeting and general meeting, which both take place on 28 January. Investors are under no obligations to vote, but they can do so by submitting two proxy forms, which should be returned by 26 January. The scheme also includes a share consolidation. This is because Vodafone's share price will fall to reflect the return of value; the consolidation merely adjusts the share price to maintain share price comparability.

If the deal is approved, investors can chose either B or C share schemes as the method for receiving the payout. These are then cancelled and replaced with cash and Verizon shares (for B shares) or a special dividend and Verizon shares (C Shares). The payouts are the same for both and the choice reflects tax treatment. With B shares, investors resident for UK tax will receive their entitlement as capital which will be subject to capital gains tax. The C share option, however, will treat the entitlement as income and will therefore receive income tax treatment. Investors will be paid the cash element in the currency in which they receive dividends. The form of election does, however, allow investors to choose a different currency.

Capital gains are generally taxed at a lower rate than income and there's also a £10,900 annual allowance, so the capital option could prove best for many investors. Moreover, according to broker Hargreaves Lansdown, "Vodafone shares in an Isa or self-invested pension plan (Sipp) will have no capital gains or income tax implications" arising from these options. Unless the completed form of election is returned by 20 February, the income option is automatically chosen.

For ease of settlement, the Verizon shares can be held on behalf of shareholders as Crest Depository Instruments (CDIs). If shareholders have less than 50,000 Vodafone shares, these CDIs can be sold for free via Vodafone's registrar, Computershare (although this may incur UK capital gains tax). Shareholders who wish to use this facility should complete the dealing form and return it by 4 April. After that, dealing charges will apply.

But dividends received on Verizon shares will be subject to a 30 per cent US withholding tax; first dividends are due in early May. So to avoid this complication, many shareholders may be better off selling their Verizon shares. For those that don't, however, it's possible to reduce US withholding tax to 15 per cent by completing a US tax form, W8-BEN. Moreover, a pension scheme exemption agreement means that no withholding tax is deducted if Verizon shares are held in a Sipp. No such exemption exists for an Isa, though.